Empirical studies on economic consequences of accounting standards

Kalogirou, Fani and Pope, Peter and Kiosse, Vicky (2012) Empirical studies on economic consequences of accounting standards. PhD thesis, Lancaster University.

Abstract

This thesis consists of three self-contained studies on economic consequences of accounting standards. The first study jointly examines the informational value of pension liability recognition mandated in France under IFRS and its effect on firms’ financing decisions. We argue that changes in pension accounting information have affected firms’ required cost of capital and/or investing decisions. Consistent with our hypothesis, we find that changes in financial leverage in the adoption period are negatively related to the surprise component of IFRS pension liability for financially constrained firms, suggesting that despite the existence of informational transfers from early adopters of IAS 19, universal mandatory adoption carries incremental informational content. The second study investigates the performance of the accounting comparability measure introduced in De Franco, Kothari and Verdi (2011). Using Monte Carlo simulations we show that the design of the DKV measure introduces unnecessary variation in estimated cross- firm and period comparability; and further that it cannot successfully identify comparable accounting systems when accounting incorporates information in returns with a lag, particularly so when firms differ in terms of their cost of capital. We suggest the inclusion of lag returns as explanatory variables in the original earnings-return relation in order to increase the measure’s ability to rank firms based on accounting comparability. The third study examines comparability and relevance of published IFRS financial statements, by examining the magnitude and nature of cross-country analyst pro-forma adjustments. We find evidence that accounting earnings comparability is increased among IFRS adopters, but the degree to which real economic performance is captured in accounting earnings still varies considerably across countries. Our analysis also indicates that IFRS adoption increased street adjustments, but less so in countries already requiring high level of disclosures. Finally, we find that analysts adjust reported earnings for fair valuing of financial instruments and expensing of research costs.